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Proposed Section 199A Regs Are Overly Burdensome, Company Says

OCT. 1, 2018

Proposed Section 199A Regs Are Overly Burdensome, Company Says

DATED OCT. 1, 2018
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October 1, 2018

The Honorable David Kautter
Assistant Secretary of the Treasury (Tax Policy)
Department of the Treasury

Mr. William Paul
Acting Chief Counsel and Deputy Chief Counsel (Technical)
Internal Revenue Service

CC:PA:LPD:PR (REG-107892-18)
Room 5203
Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044

Re: Comments on Section 199A Proposed Regulations Regarding Qualified Business Income Deduction (REG-107892-18)

Dear Sirs:

Charter Communications, Inc. ("Charter") is pleased to submit the following comments focused on the recordkeeping, reporting, and aggregation rules under the section 199A proposed regulations issued August 16, 2018. We greatly appreciate your efforts to provide needed clarifications regarding the application of section 199A, particularly the allowance for certain taxpayers to aggregate trades or businesses in an effort to help minimize burdens and allow taxpayers to structure their businesses in an economically efficient manner.

We believe that the clarifications and modifications described below are needed to the computation, reporting, and aggregation rules to help alleviate unnecessary recordkeeping and reporting burdens and avoid economic distortions. Without these changes, taxpayers with multi-tiered structures will continue to face significant reporting burdens and be forced to conduct complex reorganizations with less efficient structures to ensure their partners or shareholders get the full benefit of the section 199A deduction.

The problem generally arises because the reporting and recordkeeping requirements to track qualified business income ("QBI"), W-2 wages, and the unadjusted basis immediately after acquisition of qualified property ("UBIA") appear to be imposed on an entity-by-entity basis. Moreover, while these requirements generally fall at the entity level, the ability to aggregate under the proposed regulations applies solely at the individual level. Thus, the aggregation rules in the proposed regulations will not avoid economically inefficient decisions in organizational structures or avoid imposing significant administrative burdens on taxpayers, and will have little or no revenue consequence for taxpayers or the government.

Charter's Business Structure

Charter is America's fastest growing TV, internet, and voice company. Our business is an integrated communications business, providing customers with technology, entertainment, and communications services that connect more than 26 million residential and business customers in 41 states.

Most of Charter's operations are held through an upper-tier holding partnership that is owned roughly 90% by a publicly-traded C corporation and the remaining 10% by another group through a partnership, to which Charter will need to report section 199A information. The business is conducted through numerous lower-tier entities, most of which are disregarded for tax purposes, containing phone, cable, internet, mobile phone, and related ad sales operating units.

Many of these separate entities were created solely to meet state regulatory requirements. Others contained operations that were acquired in business acquisitions and integrated into the larger Charter network, but the legal entities were never dissolved or merged due to limitations on the continuity of their contract or franchising rights in those transactions. The entities are generally not treated as separate trades or businesses or managed separately, and, as a result, the creation of entity level financial statements involves significant administrative complexities (e.g. transfer pricing). The company's financial results are reported to investors and managed as a single integrated business (with certain information currently broken down separately for video, internet and voice). There is no distinction between the revenue streams based on separate entities. Further, adjustments between the company's book and taxable income are currently made at a level aggregating the vast majority of these entities. Determining the tax adjustments at a lower level of detail would add significant complexity to the tax compliance process.

The Proposed Regulations

The proposed regulations generally require taxpayers, including relevant passthrough entities ("RPEs"), to compute QBI, W-2 wages, and UBIA of qualified property separately with respect to each trade or business. Specifically, an RPE must determine and report information attributable to any of its trades or businesses necessary for its owners to determine their QBI deduction. Prop. reg. sec. 1.199A-6(b). The preamble to the proposed regulations states that, "in most cases, a trade or business cannot be conducted through more than one entity." Preamble at p. 43. Thus, this appears to require that taxpayers and RPEs must compute QBI, W-2 wages, and UBIA of qualified property separately at least on an entity-by-entity basis.

Treasury and the IRS provided helpful relief allowing aggregation of trades or businesses for purposes of applying the W-2 wage and UBIA of qualified property limitations if the individual can demonstrate that the following four requirements are met:

(i) the same person or group of persons, directly or indirectly, owns 50 percent or more of each trade or business to be aggregated;

(ii) the ownership described above exists for a majority of the relevant taxable year;

(iii) all of the items attributable to each trade or business to be aggregated are reported on returns with the same taxable year (not taking into account short taxable years);

(iv) None of the aggregated trades or businesses is a specified service trade or business (SSTB); and

(v) the trades or businesses to be aggregated satisfy at least two of the following factors: (1) the trades or businesses provide products and services that are the same or customarily offered together; (2) the trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources; and (3) the trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies). Prop. Reg. sec. 1.199A-4(b)(1).

In providing this relief, Treasury and the IRS specifically recognized "it is not uncommon for what are commonly thought of as single trades or businesses to be operated across multiple entities," and that not permitting aggregation in such instances could force taxpayers "to incur costs to restructure solely for tax purposes." Preamble at 44-45. Later, in the economic analysis section of the preamble, Treasury and the IRS state that the decision to allow aggregation was made to be economically efficient, minimize distortions in organizational form, and to allow taxpayers to put together "what they think of as their trade or business for the purposes of claiming the deduction under section 199A without otherwise changing ownership and management structures." Preamble at pgs. 91-92.

While Treasury and the IRS considered allowing aggregation by an RPE in a tiered structure, they determined that the necessary reporting rules "would be overly complex for both taxpayers and the IRS to administer. However, the Preamble specifically requests comments on this approach to tiered structures. Additionally, section 199A(f)(4)(B) specifically requires the Secretary to prescribe regulations for the application of section 199A to tiered entities.

Finally, it is important to note that the aggregation rules do not currently relieve taxpayers from computing QBI, W-2 wages and UBI A of qualified property for each trade or business. Preamble at pg. 47. They merely allow businesses to be aggregated for purposes of applying the W-2 wage and UBIA limitations.

Recommended Changes

We are grateful to Treasury and the IRS for providing aggregation relief for individuals and requesting comments regarding their potential extension to tiered entities. We also appreciate Treasury and the IRS requesting comments regarding potential costs and burdens arising from the regulations. These comments are responsive to those requests.

We are concerned that the proposed regulations appear to require a separate accounting of QBI, W-2 wages, UBIA of qualified property, and SSTB status to our upper-tier partnership investors for at least each entity held by the partnership. This would create significant confusion for our investors because they would receive so many separate reports and result in substantial additional compliance burdens and reporting costs.

Our recommendations are meant to alleviate these problems. Also, we believe they are consistent with the notions expressed in the preamble that businesses are often conducted across multiple entities and that taxpayers should not be forced to reorganize to aggregate and avoid unnecessary compliance burdens.

We respectfully request the following clarifications or modifications to the proposed regulations:

1) If the statement in the preamble is retained that "in most cases, a trade or business cannot be conducted through more than one entity," please clarify that a disregarded entity ("DRE") is not regarded as an entity for this purpose and that for purposes of the computations and reporting requirements under section 199A, the owner of the DRE is treated as directly conducting any trade or business.

2) Please allow for aggregation (for both computation and reporting purposes) by an RPE of commonly controlled entities conducting trades or businesses, provided the other established requirements of Prop. Treas. Reg. sec. 1.199A-4(b) are met. We believe an 80 percent common control standard would be appropriate to determine whether an RPE may aggregate trades or businesses for purposes of the proposed regulations. The common control would be determined based on both direct and indirect ownership of entities by the RPE. Absent such a change, we do not believe that the aggregation rules in the proposed regulations will achieve the stated goals of avoiding "less-efficient economic decision-making" over "ownership and management relationships within businesses chosen solely to increase the section 199A deduction." Preamble at pgs. 91-92. To be effective in minimizing economic distortions, aggregation has to be allowed at the upper-tier RPE level as that is where management and structural decisions are made.

We are grateful for the opportunity to submit these comments, and thank you in advance for your consideration of them. We would welcome the chance to discuss our comments more fully with you at your convenience.

Please do not hesitate to contact us if you have any questions or comments.

Very truly yours,

Jessica Fischer
Senior Vice President
Finance & Corporate Treasurer
Charter Communications
St. Louis, MO

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